The FDIC's fascist ruse
Mark Anderson
November 28, 2008
The FDIC should be abolished, not expanded
One troubling thing I have noticed is the way Sheila Bair's plan has been contrasted with Hank Paulson's plan, creating the impression that Sheila Bair is some kind of savior. When one really understands economics, they should understand that the Delphi Technique is being used to advance one fascist plan or another. To deconstruct prevailing orthodoxy, I am going to cover a few fundamental points.
Myth: The problem is "toxic" assets (e.g., mortgage-backed securities) which have created systemic risk
When a hospital can't collect payment, the hospital sells this debt to a collection agency. This doesn't create booms and busts. The risk wouldn't become systemic until the government started bailing out every last debtor.
Myth: Present problems were caused by bad lending, i.e., sub-prime loans
Promiscuous lending is a symptom, not a cause, of economic conditions. Take bad lending to its own logical conclusion: people just give away money as an act of charity, getting nothing in return. Does charity cause booms and busts? No. Promiscuous lending is a symptom of Federal Reserve-induced inflation, which tricked the loan market into believing it is wealthier and more solvent than it really is. Federal Reserve "liquidity" artificially lowered interest rates.
Myth: The problem is falling home prices, due to too many houses
Are there people without homes who want a home? So how anybody can suggest that there are too many homes with a straight face is beyond me. If inventories are piling up, this doesn't suggest that there are too many houses, but that the price mechanism isn't functioning. If the market were allowed to function, we would get market-clearing prices. The government has openly declared war on falling prices, preventing the market from setting the right price.
The reason why the government isn't letting the market function is because it is all about politicians and central planners not wanting to give up power. If the government were to let the market function, we would be able to return to sound money, free from central bank manipulation.
People are losing their homes because homes are unaffordable. Thus deflation is the cure, not the problem. Whether the bailout goes straight to the bank, or is done in the name of "rescuing" homeowners by buying up bad mortgages, it is all about propping up an insolvent banking system. In doing so, this diminishes the need to set market-clearing prices, ensuring that inventories pile up and people remain without a house. The best way to get people back into houses is to let prices fall, and fast. In a deflationary paradigm, it is true that nominal incomes would fall, but so, too, would prices, thus creating positive real rates of return.
Suppose you have a shop owner whose inventories are piling up, because nobody can afford to pay for his prices. What does the shop owner have to do? Lower prices. But suppose the government comes in and subsidizes the shop owner. No longer is the shop owner's sustenance dependent upon having to satisfy consumer demands, thus diminishing the need to set market-clearing prices. Or suppose the government distributed credits to this shop owner's customers. This may be perceived as some enlightened form of welfare for the shop owner's customers. However, this is yet a different way to subsidize the shop owner, by letting the shop owner sell at artificially high prices, ensuring that only the recipients of the credits can make transactions. Education and healthcare, two of the most government subsidized industries, have also had the highest levels of inflation.
The problems we face are due to the Federal Reserve's constant debasement of the currency (i.e., inflation), as well as further inflationary credit expansion by the loan market. This created artificially high prices that never should have been, and has caused the insolvency of the loan market itself.
Myth: The FDIC is good for depositors
The FDIC offers deposit insurance for bank customers, which is really a way to bailout insolvent banks. Could you imagine being able to run a ponzi scheme (e.g., fractional-reserve banking), knowing that when your insolvency is exposed, the government would pay off your customers (i.e., a de facto bailout of you)? This creates yet another layer of moral hazard on top of the Federal Reserve injecting "liquidity" into the loan market. Thus FDIC's true purpose is designed to keep the fractional-reserve banking system intact.
Needing to insure bank deposits should raise questions in and of itself. Unlike natural disasters, economic risk can't be pooled. It is one thing to guarantee one's solvency, should they get wiped out due to, say, a flood. It is quite another to guarantee solvency, per se. It is impossible to insure against economic miscalculation and loss. If you were to go into business, and I offered to insure you against business failure, all that is happening is that I am becoming the true entrepreneur in the deal, since I am underwriting/assuming the risk.
The FDIC is backed by the government, which is backed by the Federal Reserve, which is backed by a printing press, which is backed by the savings of Americans. Not only is the concept of insuring economic risk altogether chimerical, but there is a reason why only a government-backed entity would offer such a thing to banks. Inflationary credit expansion/fractional-reserve banking makes banks inherently insolvent. Demand deposits are payable on demand, while banks are lent long. Thus the time structure of assets and liabilities does not match.
At the end of the day, the FDIC/Treasury/Federal Reserve can ensure that depositors pull money out of their bank, but there is no guarantee that their money will be worth anything. In fact, when one scrutinzes the role of the FDIC more closely, they can see that its entire purpose is keeping the good ole' boy network intact, leaving Americans with nothing.
If the free market were allowed to function, the government's role would be limited to enforcing contracts. If homeowners default, the bank would foreclose. But if the bank defaults, the bank's creditors - i.e., its depositors - would take over its assets. Thus, in the event of a bank run, depositors would then take possession of the bank's housing inventory.
But what does the FDIC do? If a bank fails, the FDIC sends in federal regulators to protect the bank's assets from its depositors. In many instances, the FDIC has arranged shotgun mergers with investment banks on Wall Street, turning investment banks into bank holding companies. So we can see this sleight-of-hand trick - under the guise of protecting depositors - is really designed to transfer real assets (i.e., housing inventories) from failed banks to Wall Street, while promising depositors nothing more than globs of Ben Bernanke's "liquidity."
There is no way for the Fed to bail out every last insolvent bank without completely destroying the dollar, which would wipe out every last holder of dollars (including depositors). Before the bank runs really start, and Americans are left both without houses and their deposits (or with a worthless dollar), we need to throw the politicians out of office and start fresh.
One troubling thing I have noticed is the way Sheila Bair's plan has been contrasted with Hank Paulson's plan, creating the impression that Sheila Bair is some kind of savior. When one really understands economics, they should understand that the Delphi Technique is being used to advance one fascist plan or another. To deconstruct prevailing orthodoxy, I am going to cover a few fundamental points.
Myth: The problem is "toxic" assets (e.g., mortgage-backed securities) which have created systemic risk
When a hospital can't collect payment, the hospital sells this debt to a collection agency. This doesn't create booms and busts. The risk wouldn't become systemic until the government started bailing out every last debtor.
Myth: Present problems were caused by bad lending, i.e., sub-prime loans
Promiscuous lending is a symptom, not a cause, of economic conditions. Take bad lending to its own logical conclusion: people just give away money as an act of charity, getting nothing in return. Does charity cause booms and busts? No. Promiscuous lending is a symptom of Federal Reserve-induced inflation, which tricked the loan market into believing it is wealthier and more solvent than it really is. Federal Reserve "liquidity" artificially lowered interest rates.
Myth: The problem is falling home prices, due to too many houses
Are there people without homes who want a home? So how anybody can suggest that there are too many homes with a straight face is beyond me. If inventories are piling up, this doesn't suggest that there are too many houses, but that the price mechanism isn't functioning. If the market were allowed to function, we would get market-clearing prices. The government has openly declared war on falling prices, preventing the market from setting the right price.
The reason why the government isn't letting the market function is because it is all about politicians and central planners not wanting to give up power. If the government were to let the market function, we would be able to return to sound money, free from central bank manipulation.
People are losing their homes because homes are unaffordable. Thus deflation is the cure, not the problem. Whether the bailout goes straight to the bank, or is done in the name of "rescuing" homeowners by buying up bad mortgages, it is all about propping up an insolvent banking system. In doing so, this diminishes the need to set market-clearing prices, ensuring that inventories pile up and people remain without a house. The best way to get people back into houses is to let prices fall, and fast. In a deflationary paradigm, it is true that nominal incomes would fall, but so, too, would prices, thus creating positive real rates of return.
Suppose you have a shop owner whose inventories are piling up, because nobody can afford to pay for his prices. What does the shop owner have to do? Lower prices. But suppose the government comes in and subsidizes the shop owner. No longer is the shop owner's sustenance dependent upon having to satisfy consumer demands, thus diminishing the need to set market-clearing prices. Or suppose the government distributed credits to this shop owner's customers. This may be perceived as some enlightened form of welfare for the shop owner's customers. However, this is yet a different way to subsidize the shop owner, by letting the shop owner sell at artificially high prices, ensuring that only the recipients of the credits can make transactions. Education and healthcare, two of the most government subsidized industries, have also had the highest levels of inflation.
The problems we face are due to the Federal Reserve's constant debasement of the currency (i.e., inflation), as well as further inflationary credit expansion by the loan market. This created artificially high prices that never should have been, and has caused the insolvency of the loan market itself.
Myth: The FDIC is good for depositors
The FDIC offers deposit insurance for bank customers, which is really a way to bailout insolvent banks. Could you imagine being able to run a ponzi scheme (e.g., fractional-reserve banking), knowing that when your insolvency is exposed, the government would pay off your customers (i.e., a de facto bailout of you)? This creates yet another layer of moral hazard on top of the Federal Reserve injecting "liquidity" into the loan market. Thus FDIC's true purpose is designed to keep the fractional-reserve banking system intact.
Needing to insure bank deposits should raise questions in and of itself. Unlike natural disasters, economic risk can't be pooled. It is one thing to guarantee one's solvency, should they get wiped out due to, say, a flood. It is quite another to guarantee solvency, per se. It is impossible to insure against economic miscalculation and loss. If you were to go into business, and I offered to insure you against business failure, all that is happening is that I am becoming the true entrepreneur in the deal, since I am underwriting/assuming the risk.
The FDIC is backed by the government, which is backed by the Federal Reserve, which is backed by a printing press, which is backed by the savings of Americans. Not only is the concept of insuring economic risk altogether chimerical, but there is a reason why only a government-backed entity would offer such a thing to banks. Inflationary credit expansion/fractional-reserve banking makes banks inherently insolvent. Demand deposits are payable on demand, while banks are lent long. Thus the time structure of assets and liabilities does not match.
At the end of the day, the FDIC/Treasury/Federal Reserve can ensure that depositors pull money out of their bank, but there is no guarantee that their money will be worth anything. In fact, when one scrutinzes the role of the FDIC more closely, they can see that its entire purpose is keeping the good ole' boy network intact, leaving Americans with nothing.
If the free market were allowed to function, the government's role would be limited to enforcing contracts. If homeowners default, the bank would foreclose. But if the bank defaults, the bank's creditors - i.e., its depositors - would take over its assets. Thus, in the event of a bank run, depositors would then take possession of the bank's housing inventory.
But what does the FDIC do? If a bank fails, the FDIC sends in federal regulators to protect the bank's assets from its depositors. In many instances, the FDIC has arranged shotgun mergers with investment banks on Wall Street, turning investment banks into bank holding companies. So we can see this sleight-of-hand trick - under the guise of protecting depositors - is really designed to transfer real assets (i.e., housing inventories) from failed banks to Wall Street, while promising depositors nothing more than globs of Ben Bernanke's "liquidity."
There is no way for the Fed to bail out every last insolvent bank without completely destroying the dollar, which would wipe out every last holder of dollars (including depositors). Before the bank runs really start, and Americans are left both without houses and their deposits (or with a worthless dollar), we need to throw the politicians out of office and start fresh.
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